Swift & Company Goes Brazilian

Months of rumor and speculation ended this week with the announcement that Swift & Company was to be purchased by J&F Particpacoes S.A. of Brazil. J&F owns 77% of JBS, the largest beef processor in Brazil.

Months of rumor and speculation ended this week with the announcement that Swift & Company was to be purchased by J&F Particpacoes S.A. of Brazil. J&F owns 77% of JBS, the largest beef processor in Brazil.

Swift sold for $225 million, with J&F agreeing to pay the transaction costs and assume $1.2 billion in debt. This would value Swift at about $1.4 billion, which was seen by industry insiders as a pretty steep price. It's steep in the sense that Swift had posted only one profitable quarter since BSE shut down U.S. beef export markets in 2003. Plus, Swift was rocked by immigration raids last December that decimated its workforce.

The steep price is justified by the fact JBS wants to gain access to the two most lucrative beef markets in the world -- the U.S. and North Asia. The purchase allows it to do so, and positions it to take advantage of the reputation of American beef, the world standard for high-quality, corn-fed beef. The purchase also allows JBS to establish a global presence.

The purchase gives JBS potential sales of nearly $12 billion, and greatly increases its beef-processing capacity. Swift's capacity is 5,500 head/day, while JBS' capacity prior to the purchase was only 800-1,600/day. As JBS lacks the expertise to run such a large plant, it plans to essentially retain the current Swift management.

Prior to the sale, Smithfield was thought to be the leading contender for Swift, with Cargill, National Beef and Seaboard all having expressed interest. Now the industry will focus on Smithfield, which has been very obvious in its desire to build its beef-processing position, to see if it responds by adding capacity. Such a step could create a lot of pressure on packing margins in the short term.

From an industry perspective, it will be interesting to witness the reaction to a foreign-based company taking ownership of Swift. Anti-global sentiment has resonated well among some fringe cattlemen groups, but concern over the prospect of a Swift ownership change had centered on its leading to further consolidation in the U.S. Instead, the purchase of Swift by JBS adds another major player to the mix.

As is always the case, a major change in ownership will likely lead to other changes in the packing industry, so stay tuned. JBS paid a lofty price premium to enter the market. In so doing, it is taking a very strategic and long-term outlook to the acquisition. Expect them to be in it for the long haul.